Can The Farm Bills Promote Agricultural Prosperity?

By Sabina Yasmin

The recently passed “Farm Bills 2020” are a welcome change as the historic ordinances in agriculture aim to reshape how agricultural produce is stored, marketed and sold in the country. The three bills on agricultural market reforms are: 

(i) ‘Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill’, 2020 

(ii)‘Farmers’ (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill’, 2020

(iii) ‘Essential Commodities (Amendment) Bill’, 2020

One India, One Market

The bills aim to promote the vision of “One India, One Market”. The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill aims to free farmers from the shackles of the Agriculture Produce Marketing Committees  (APMC) legislation. These committees  were set up to protect farmers from being exploited by intermediaries and ensure that prices of agricultural commodities remain in check.  However, selling goods at APMC yards soon became a painful experience for the farmers –  cartelization, undue deductions in the form of market fees and commission charges and hindering the entry of new players are some of the challenges that farmers continue to face. Though the bill does not do away with the APMC,  it allows farmers to sell their produce outside APMC at a higher price, which was not permitted earlier. 

The Farmers’ (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill  ensures that farmers are allowed to enter into contracts with buyers. Here, farming is carried out on the basis of the agreement between the buyers and the producers. The Essential Commodities (Amendment) Bill  (ECA)removes stockholding  restrictions on the storage of essential commodities like pulses, oilseeds, and onions.

The new bill also moves forward in 

(i) limiting the operation of APMC laws by states to the market yards;

(ii) Allows private parties to set up online trading platforms for trading in agricultural commodities

(iii) Sets up a dispute-resolution mechanism for buyers and farmers to be operated by a sub-divisional magistrate.

The promises to unshackle farmers from age-old bondages are however, accompanied by a fair number of concerns. The billsallow private parties to set up online trading platforms for trading in agricultural commodities. There is a lack of adequate infrastructural set-up to support this. This is evidenced by  the recent pandemic during which the sale and purchase through e-nam app was not adequately implemented across different states during the Rabi harvest.One of the greatest advantages that farmers receive through this bill is the assurance of a price even before sowing their crops through signing contracts with the corporates. But devoid of proper guidelines for these contract agreements and dispute settlements, the small farmers are at risk of being left with less bargaining power at the mercy of powerful corporates. 

These new reforms without doubt raise quite a few questions for the agriculture sector. Will the bills be successful in bringing in the desired change? Will the farmers gain from these reforms? These  questions can be best answered in the long run. However, for the farm bills to be successful in achieving their desired results, there are some key needs that need to be addressed. 

a) Need for proper legislation and infrastructure

The APMC, despite its faulty structure, has an advantage in the form of well laid out infrastructure and connectivity in its area of operation. However, with only 7000 APMC markets operating across the country, the majority of agricultural marketing already happens outside the mandi network. States like Bihar, Kerala and Manipur had already abolished the APMC system. It is to be noted that most private buyers are currently small traders at local mandis. The removal of stock limits and facilitation of bulk purchase and storage through the amendment to the Essential Commodities Act could bring large corporate players into the agriculture space. Although they will bring much-needed investment, they could also skew the playing field, with small farmers unlikely to match them in bargaining power. These corporates will usually target purchasing the cream  produce that can meet export requirements. The bulk produce not meeting these requirements would still be left unpurchased, to be sold to local tradesmen by the farmers. 

There is a high possibility that the farmers might still want to sell their produce in the designated mandis. For instance, in 2006, Bihar revoked its APMC Act with a similar objective to attract private investment in the sector and allocated responsibility of the markets to the concerned sub-divisional officers in that area. This resulted in the erosion of the existing marketing infrastructure due to poor upkeep. In markets that were beyond regulation, farmers faced issues such as high transaction charges and lack of information on prices and arrival of produce. The Committee of State Ministers, constituted in 2010 for agricultural marketing reforms, observed that complete deregulation of markets did not help in attracting any private investment. It noted that there was a need for an appropriate legal and institutional structure with a developmental type of regulation to ensure orderly functioning of markets and to attract investment for infrastructure development. As suggested by the committeeGramin Haats (small rural markets) can emerge as a viable alternative for agricultural marketing if they are provided with adequate infrastructure facilities. It recommended that the Gramin Agricultural Markets scheme (which aims to improve infrastructure and civic facilities in 22000 Gramin Haats across the country) should be made a fully funded central scheme and scaled to ensure the presence of a Haat in each panchayat of the country.  

b) Need for adequate financial inclusion institutions

The bills also demand a well laid financial framework and infrastructure to be the supporting backbone of the agricultural sector. The Government had announced the formation of 10000 new Farmer Producer Organisation (FPOs) to ensure economies of scale for farmers over the next five years. Since the existing and new FPOs are expected to be the point of aggregation between the farmers and the traders, corporates, and other buyers in contract farming, they have an important role to play in bringing in the desired outcomes. These FPOs would need to invest in increasing agricultural productivity, enhancing the technological advancement among member farmers, promoting crop diversification, etc. which would eventually need more capital investment and credit requirements. 

The farmers and the aggregators willing to sell directly or enter into a contract with the corporates will increase dependence on formal credit. With only  30% of all farmers borrowing from formal sources, while 50% struggle to borrow from any source, the financial institutions need to have greater penetration and be more accessible to meet the credit needs of the farmers. This will boost the farmers’ interest to switch to better farming practices to enhance productivity and quality of the produce. Moreover, as one of the important steps towards achieving this, the central government has proposed the development of basic infrastructure in Gramin Haats through the National Rural Employment Guarantee Scheme and of marketing infrastructure through the Agri-Market Infrastructure Fund. The Fund will be set up by NABARD to provide Rs 1000 crore to states at a concessional interest rate for the development of marketing infrastructure in Gramin Haats.

c) Need for appropriate risk cover:

One of the greatest advantages that farmers receive through the bill is the price assurance even before sowing any crops. The corporates would do this to facilitate/encourage farmers to switch producing crops as per their requirements. Though in this case the farmer’s price risk is taken care of, and the farmer is not exposed to vulnerability; it does imply a need for adequate risk cover for the other party. Similarly, this calls for adequate risk cover in contractual arrangements, adoption, and shifting of new agricultural practices by the farmers, provision of services by aggregators like the FPOs. The idea of contract farming is not totally new but is definitely not in the mainstream.

There have been success stories of contract farming in poultry (66% of poultry production through contract framing), sugarcane, and seeds. In the case of seed production through contract farming, the seed companies provide foundation seeds to farmers who, in turn, deliver certified seed to companies. This is governed by the  National Seed Corporation that has a well-defined protocol for contract farming for seed production. Mostly, the farmers receive a price equal to or higher than the Minimum Support Price (MSP). Generally, the farmers do not default on the delivery of seeds. In any instance, if they did, the seed companies would need some additional coverage. Products like meso-level insurance could be potential risk mitigation products for the companies and aggregators in similar situations.

While the agricultural community is looking forward to the farm bills with mixed reaction, a majority of agricultural experts believe that these reforms are a definite game-changer in the lives of the farmers, likely to bring about positive outcomes. While the bills promote an ecosystem where the farmers and traders can indulge in barrier-free trade, transfer of risk from farmer to sponsor through contract farming agreements, uptake of technological advancements in trading by promoting e-platforms and e-transactions, adoption of modern technology, and injection of private investment in the agricultural sector, it also raises few concerns that can offset the benefits. In this context, it becomes important to take into consideration the above mentioned key areas that provide the requisite socio-infrastructural support for the farm bills to be a success. It will be interesting to witness if the policy change favours the long waiting agrarian community or adds to the existing woes.  

About the Author

Sabina Yasmin is a Research Fellow at LEAD at Krea University and a Bharat Inclusion Research Fellow , 2020. Her areas of research include development economics and applied microeconomics. She has a keen interest in agricultural economics and risk mitigation mechanisms in agriculture.